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ORDINARY SHARES
PREFERENCE SHARES
1. Definition: Section 4 of CA
1. Ordinary shares or sometimes referred to
2. Preference shareholder does not entitle to
as equity shares are shares which are not
the right to vote at a GM or to any right to
given any special rights.
participate beyond a specified amount in
2. It carries all the rights of the ordinary
any distribution whether by way of
member, namely:
dividend, or on redemption, in a winding
up, or otherwise.
Unlimited voting rights in GM, which
give the power to influence the policies 3. Section 66 of CA if the company issues
preference shares, the rights attaching to
of the company.
the shares must be mentioned in either
Entitlement to any surplus assets of the
MOA or AOA.
company in winding up
4. The rights of preference shares are:
Right of return of capital of winding up
Right to fixed dividend (must be stated
Not entitled to a fixed rate of dividend
on MOA or AOA)
3. In a financial year, rights to dividend come
Right to return of capital upon winding
after the preference shareholder.
up in priority.
4. If the company has a poor financial year,
adopted Table A of Fourth Schedule, where Article 4 provides that class rights may be varied
by a written consent of the holders of three quarter of the issued shares of that class and special
resolution passed at a separate meeting of that class of shareholders.
What amount to variation of class rights?
Apart from cancellation of class right, issue of new shares can also amounted to variation.
The corporate actions that affect the value of shares in a particular class or the enjoyment of
rights attaching to shares in that class is not sufficient to constitute a variation of class right.
This was illustrated in White v Bristol Aeroplane where a bonus issue of shares to ordinary
shareholders, that greatly diluted the voting rights of preference shareholders, was held not to
amount to a variation of class rights attaching to preference shareholders.
In Greenhalgh v Ardene Cinemas, the company had issued preference shares and
ordinary shares each carrying one vote. It then issued shares to Mr. Greenhalgh that carries
with him sufficient votes to block a special resolution. The other members proposed to the
company to subdivide their shares, greatly increasing the number of votes they held. The effect
was to diminish the proportions MR. Greenhalgh had. This was held not to be the variation of
class rights attaching to Mr. Greenhalghs shares, because he still retains the same voting
rights.
However, Section 65(6) of CA provides that the issue of new preference shares ranking in
pari passu with the existing preference shares amount to variation of the existing preference
shareholders rights.
Members right to oppose the variation.
Section 65 of CA provides that holders of not less than 10% of the issued shares of the
class, whose rights have been varied may within one month after the variation, apply to court to
set aside the variation.
The court may make the order if it is satisfied that the variation would unfairly prejudice
the members of the class.
FORGED TRANSFER
Definition
A forged transfer is a total nullity and the true owners name must be restored back to
the register of members.
The innocent purchaser who is without knowledge, in good faith and has provided
valuable consideration cannot acquire better title than the defective title of person who commits
forgery.
This was illustrated in the case of Re Bahia v San Francisco Rail Company where the
court held that;
i.
The true owners name must be restored back to the register of member. Forged
transfer is a total nullity.
ii.
iii.
The company is liable to pay damages because it was stopped from denying that the
person who forged the signature is the true owner.
iv.
v.
Immediate purchaser then may sue the forger of the owners signature.
SHARE CAPITAL
Fiduciary Duties
The fiduciary duty of the director is owed to the company and not to individual
shareholder.
Section 132(1) of CA provides that a director of a company shall at all times exercise
his power for a proper purpose and in good faith in the best interest of the company.
This was illustrated in the case of Mills v Mills where the court held that what is in the
best interest of the company in fact what is fair among all the shareholders. If a decision treats
all the shareholders equally does not discriminate between one group of shareholder and
another, then it will be in the best interest of the company.
Apart of that, directors also owed fiduciary duty to avoid conflict of interest. Director
should not enter into engagement in which there is a possibility that the directors personal
interest could conflict with those of the company which they were bound to protect.
Section 131(1) of CA states that a director of a company who has a material interest
whether direct or indirect in a contract or proposed contract with the company must disclose his
interest at a meeting of directors of the company.
In Aberdeen Railway Co, the plaintiff entered into a contract with the defendant for the
supply of a large quantity of iron seats. At the time the contract was entered into, one of the
partners of defendants was a director of plaintiffs company. Upon discovering this, the plaintiff
sought to avoid the contract even though the terms were fair. It was held that the duty should be
strictly applied even though the contract was fair.
At common law, a person can be a director of several companies provided the person
does not breach any of the directors duties. However, directors may breach his duties if he
becomes directors of rival companies.
Section 132(2)(e) of CA states that a director shall not engage in business which is in
competition with the company unless consent or ratification of general meeting is obtained.
Further, section 131(5) of CA requires directors of the company to disclose any office where
duties or interest might be created that conflict with duties and interest as directors.
This was illustrated in the case of Kea Holdings Pte Ltd, the defendant was a director
in plaintiffs company which main business is selling and purchasing ships. The defendant was
also a shareholder and director of another company named Sinindo.
The plaintiff placed orders for several vessels but the defendant advised the plaintiff to
cancel the order to avoid payment of export duty. The defendant also alleged that there were no
buyers for the vessels. The plaintiff cancelled the orders and had to loss its deposit.
The plaintiff sued the defendant because the defendant knew that Sinindo is looking for
vessel to purchase and rather than ensuring Sinindo purchased from plaintiff, Sinindo bought
from another company and he received commission for such purchase.
The court held that although the defendant was not prohibited to hold directorship in
another company, he owed a duty not to place himself in a position where his duty to plaintiffs
company and his own interests are in conflict.
Section 132(2)(c) of CA provides that director must not use his position as directors.
This was illustrated in the Mahesan v Government of Malaysia where the plaintiff was
a director and employee of the society. Its object was to provide housing for government
employees. In connection with a transaction involving the purchase of land, Mahesan received a
bribe from one purchaser who purchased the land for a lesser value. The purchaser later sold it
to the society for a very high value where one quarter of the profit was later paid to Mahesan as
a bribe. The court held that the society was entitled to recover the amount of the bribe or
alternatively damages for Mahesan's breach of duty.
In Cook v Deeks, the directors of a company carrying on the business of railway
construction contractor obtained a contract in their own name. On an action brought by
shareholders to the Privy Council, it was held that there was a breach of trust on the part of the
director and that the benefit of the contract belonged to the company and they were bound to
account to the company for it.
A director might be acting honestly in what he considers to be the company's interest
and yet still be in breach of his fiduciary duties. This would occur if he misapplies the companys
assets or if he uses the powers he is delegated for the wrong purpose. It does not matter
whether he is acting honestly, or in what he considers the interest of the company.
This was illustrated in Bishopsgate Investment Management Ltd v Maxwell, a
director was held to have used his powers as a director for an improper purpose where he gave
away the companys assets to a family company for no consideration.
LOANS TO DIRECTORS
Section 133 of CA prohibits a company from granting loan to a director of the company
or enters into any guarantee or provides security in connection with the loan to such director.
However, this section does not apply to exempt private company.
The aim of this section is to prevent directors from improperly using the companys funds
especially when the directors are also the shareholders.
Further, section 133A of CA prohibits a company from giving loan or provides security
or guarantee to any person connected with a director. This section also does not apply to
exempt private company. Section 122A provides that a person is deemed to be connected with
a director if he or she is a family member of that director; a body corporate which is associated
with the director or a trustee of a trust where the director or his family member is a beneficiary.
REMOVAL OF DIRECTORS
Section 128(1) of CA provides for the removal of directors for public companies. A
director of a public company even before the expiration of his term may be removed from his
office by a simple resolution, notwithstanding anything in its memorandum or articles or any
agreement between it and him. The office of director then becomes vacant on the passing of the
resolution.
Section 128 (2) and (3) of CA state that if the statutory power is to be exercised, special
notice of 28 days must be given and the director has the right to make representation in writing
and send to every member of the company. If the representation in writing is received too late
and no time to send a copy to every member before the resolution, then the director may
request that the representation be read out at the meeting or he can request right to be heard at
the meeting orally.
In Soliappan V Lim Yoke Fan, the company's AOA provided that a director might be
removed with the service of 7 days' notice in any general meeting. The plaintiffs wanted to
remove all the directors of the company and sent the notice of resolution for removal of the
directors 3 days before the meeting. At the meeting, the plaintiffs were purportedly elected as
directors after the defendant had been removed. The court held that Section128 was not
mandatory. Therefore, the removal could be affected in accordance with the AOA, which provide
for shorter notice. However, since the proper notice required under the AOA had not been given
either, the defendant had not been properly removed as director and consequently the plaintiff
was not properly appointed as director of the company.
Firstly, a minority member can take legal action against the company for acting ultra
vires or illegal to the object of the company. The court in Ashbury Railway Carriage & Iron Co
v Riche ruled that such an act is wholly void and is not capable of being ratified even by all the
members of the company subsequently.
In Malaysia, this exception is no longer of much significant because of section 20 of CA
which preserves the validity of ultra vires act. Companys incapacity may only be raised in
proceeding against the company to restrain an ultra vires transaction as in accordance with
section 20(2)(a) but the power to restrain is lost if the transaction is wholly executed by virtue of
Section 20(2)(b).
Secondly, where an individual members right have been infringed they may bring an
action against the company. These membership rights arise from the Act, articles or separate
shareholders agreement.
This was illustrated in Wood v Odessa Waterworks, the court ruled that it was the right
of the members to have dividends paid in cash as the articles so specify.
Thirdly, the minority may also bring a legal action against the company in the event
where a special resolution was needed but the company acted in breach of it.
This was shown in Edward v Halliwell where the constitution of a trade union provided
that alteration of the contributions of employed members could only be made by a ballot vote of
the members and three quarter majority must be obtained. However, during the second world
war, a meeting of the union was made and a resolution increasing the amount of contributions
was passed without taking a ballot and without obtaining three quarter majority. The court held
that the resolution was invalid.
Lastly, the company can also be sued where there is fraud on minority. Two elements
must be satisfied before a member can bring an action to enforce the companys rights. He
must establish, that is, fraud on the minority and the wrongdoer is in control.
Fraud on the minority includes abuse or misuse of power whereby the majority obtains
an unfair gain at the expense of the minority. Wrongdoer control may exist if the wrongdoer has
a majority of the votes, or the majority has approved a fraud on the minorities where they obtain
some benefit.
In Cook v Deeks, the directors of a company carrying on the business of railway
construction contractor obtained a contract in their own name. On an action brought by
shareholders to the Privy Council, it was held that there was a breach of trust on the part of the
director and that the benefit of the contract belonged to the company and they were bound to
account to the company for it.
COMPANY BORROWING
FLOATING CHARGE
Definition
A floating charge is intended by the parties to cover a class of property but not to attach
to specific items within the class until some future event occurs. The company has freedom to
continue to deal with the asset charged in the ordinary course of its business.
Characteristics
A floating charge has been defined as having 3 characteristics as laid down in the case
of Re Yorkshire Woolcombers Association Ltd.
Firstly, it is a charge on a class of assets present and future. For instance, if it applies to
stock in trade or book debts, it comprises whatever assets of that class the company may own
at the moment of crystallization.
Secondly, the class of assets will change from time to time in the ordinary course of the
companys business.
Thirdly, the company may carry on its business and dispose of the assets in the course
of the business until the charge crystallizes. The existence of the floating charge does not affect
the goods once they are disposed of. When the charge crystallizes, however, it affects all the
goods within the class at the same time. These goods are then subject to a fixed charge.
Creation of floating charge
There is no particular form of words required to create a floating charge. It is a question
of interpretation of the particular loan instrument whether the security created is a fixed or
floating charge.
However, the court in Re Bright Life ruled that it is possible to provide in the instrument
that creates the charge that it will crystallize at the option of the creditor. For instance, the
debenture may be so drafted as to give the holder the option to convert the floating charge into
a fixed charge by giving notice to the company.
Advantages and disadvantages of floating charge
The benefit of floating charge is that it enables the company to give security over the
property such as raw materials, stock in trade and inventory that are constantly flowing in and
flowing out of its ownership in the course of carrying on its business.
However, the floating charge is considered to be a weak form of security because it has
several disadvantages as compared to fixed charge as the general rule the fixed charge has a
priority over a floating charge. Apart of that, the value of the security is uncertain. A floating
charge may also lose to judgment creditor who levies execution on the goods.
Crystallisation of Floating Charge
Sometime, lenders will further protect themselves by inserting a clause for automatic
crystallisation. The major difference between the right and powers of the chargee under a fixed
charge and floating charge is that the crystallisation of the floating charge must occur before the
chargee may exercise the rights, whereas a holder of a fixed charge may automatically exercise
them if there is a default under the charge.
A floating charge allows a company to dispose of property the subject of the charge, in
the ordinary course of business, until the occurrence of some particular event specified in the
instrument creating the charge or implied by law. At this point the charge crystallise into a fixed
charge over all the property currently within the class over which the charge applies.
These events usually set out in the charge document. The events that trigger
crystallisation may include an appointment of liquidator or receiver, cessation of companys
business or an event of default specified in the instrument creating the charge
In Malaysia, the application of the automatic crystallisation clause has been approved in
Silverstone Marketing Sdn Bhd where the court rejected the contention that the enforcement
of automatic crystallisation would cause injustice to bona fide third party on the ground that the
third party should conducted an official search on the company before hand in order to find out
the existence of any floating charge.
The court in Malaysia International Merchant Bankers Bhd v Highland Chocolate &
Confectionery Sdn Bhd affirms that crystallisation occurs automatically on the occurrence of a
specified event in the floating charge and without need for a notice to be issued to the floating
chargor.
REGISTRATION AND NON-REGISTRATION OF CHARGE
Where a company creates a registrable charge, it must provide certain information to the
CCM. The information will be entered in the register of charges maintained under section 111,
Part VI of CA.
Functions to register the charge are to inform a person dealing with the company that
there is a creditor who has rights in respect of the companys property. Secondly, it establishes
the order of priority among registrable charge and the validity of registrable charges as against
the liquidator or administrator of the co.
Section 108(1) of CA provides the registration shall be lodge within 30 days after the
creation of the charge. Section 108(3) lists the charges which are registrable under the Act.
Charges over the land are also registrable under NLC 1965.
Registration is affected by lodging a notice in the prescribed form and providing a copy
of the charge to the CCM as provided in section 108(5). If the charge is not registered under
Sec 108(1), the charge will be void against the liquidator or any creditor of the company.
Section 108(2) provides if the charge become void because of non-registration under
section 108(1), money secured become immediately recoverable. For instance the bank may
claim back the money despite the term of agreement.
Section 109 provides a charge may be registered by company or by any person
interested in the document. If the charge is not registered, the charge may lose its priority as
against later charges, or finds its charge unenforceable as against the liquidator or
administrator.
PRIORITY OF CHARGES
Generally, a fixed charge takes priority over any subsequent fixed charge of the same
property and a floating charge takes priority over a subsequent floating charge by order of
creation.
Fixed charge will take priority over a floating charge created at any time even though the
fixed charge created after the floating charge, as long as it was given before the floating charge
crystallized.
However, floating charge will take priority over later fixed charge in two instances.
Firstly, if a debenture creating floating charge inserted negative pledge clause that
restricts the power of the company to grant later fixed charged ranking pari passu with or in
priority to the floating charge.
Secondly, the later chargee has notice of the earlier floating charge and the restriction
contained in it. However, the court in Siebe Gorman v Barclays Bank ruled that the mere
notice of the existence of a floating charge is in itself insufficient to constitute the requisite
knowledge of the restrictive clause contained in the charge so as to subject the later charge to
such restrictions. This is because when a floating charge is registered, it gives a constructive
notice of its existence but not give notice of its terms.
Thirdly, floating charge also can get priority if it is registered first and becomes
crystallized before fixed charge is created.
Once a floating charge crystallized, the chargee is entitled to rank as a secured creditor
and will therefore be paid before the unsecured creditor in any liquidation.
Until that time, however, the holder of floating charge cannot prevent the company from
paying off its unsecured creditors in the normal course of business. This is because where the
company is wound up, certain preferred creditors are entitled to be paid in priority to the holder
of the floating charge, even if crystallization has occurred before liquidation as provided in
section 292 of CA